Posts Tagged ‘Econobrowser’

The employment picture in Wisconsin so far this year has been grim. Whereas the country has seen year-on-year (y/y) job growth above 1.0% each month through July, the Badger State has seen y/y declines every month. As of July, Wisconsin payrolls had shed 0.8% since the same time last year. Although the state’s important manufacturing sector is creating jobs, expanding at a 1.3% pace since July 2011, many other sectors continue to decline. The already beleaguered construction sector continues to be pummeled, shedding 7.7% y/y in July because of continued weak demand for new single-family homes and a lack of public infrastructure projects. And contrary to the trend throughout most of the country, where professional and business services has been a stalwart of the recovery, that sector’s payrolls have declined 0.8% here. In addition, leisure and hospitality services jobs declined 6.7% from their July 2011 level. The finance sector continues to suffer as well, dropping 1.8% y/y in July. Although the state’s jobless rate has remained below the national average, it continues to climb, with July bringing more bad news, when it climbed to 7.3% from 7.0% in June.

Beezer here. Then there’s a chart showing how Wisconsin stacked up versus other regions.

Beezer again. Wisconsin will do better as the nation does better, of course. But Walker’s austerity budget and policies have not helped Wisconsin. In fact it appears it’s hindered the state’s economy. This state experiment in austerity policies is an indicator of what the nation faces if they are applied nationally. Grim.

Last May, Governor Romney stated that in a typical recovery, monthly employment increases should be about 500,000 per month [1]. The sheer implausibility of that statement (assessed in this post) has induced him to reduce his estimate (without explanation of the change) to 250,000 per month. [2]. In Figure 1, I provide a plot of the implied path, as well as that from his May statement (which made me laugh for days!). In other words, his forecast has moved from clearly “Heritage Foundation space” to something that seems a bit less implausible, even if not clearly motivated by a specific model.

Interesting observations:

The 500,000 number clearly exceeds that recorded in recent history. Kudos to Governor Romney for disposing of that number.

While 250,000 jobs per month is more in line with recent “jobless recoveries” (i.e., after the recessions of 1990-91, 2001, and 2007-09), it is still substantially above that recorded during the G.W. Bush recovery (250K >> 91.7K). It is also very much above (!!!) the 11,100 jobs per month recorded during the entire G.W. Bush administration, when we last implemented tax cuts advocated by supply-side advocates.

250,000 is also above that recorded in the 1991-2001 recovery (196,700/mo, mostly spanning the Clinton Administrations).

To my knowledge, the 250,000 figure is not based on simulations from a model. Rather (inferring from the Romney white paper), it is based on extrapolations from two previous recessions, specifically the 1974-75 and 1981-82 recessions.

Beezer here. Econobrowser also points out that balance sheet induced recessions are historically much more difficult to recover from and cites a recent IMF study as supporting evidence for that view. The lesson is that Romney is not immune to making ridiculous assumptions to give his more outrageous predictions a sheen of respectability–until someone with academic heft, like the Tax Policy Center report last week on Romney’s tax reforms plans, dismantles his claims.

There’s a consensus building that the rising price of petroleum will inevitably slow consumer spending in developed countries, but that the rapid growth of Far East developing countries (primarily China and India) will continue to power over all economic growth.

First some detail regarding the price of oil and it’s impact on US consumer driven spending. From the econobrowser blog site.

Consumption spending slowing down

Guess what: rising energy prices are taking a toll on consumers.

On Monday the Bureau of Economic Analysis released details on personal consumption expenditures for February, allowing us to update our graph of how big a share energy is in American budgets. A 6% expenditure share marked the point at which we started to see significant consumption responses a few years ago. The share in February is essentially there (5.98%, to be exact), the highest it’s been since October 2008. For poorer households, energy’s budget bite is a significantly larger percentage.

Energy expenditures as a percentage of consumer spending. Calculated as 100 times nominal monthly consumption expenditures on energy goods and services divided by total personal consumption expenditures. Data source: BEA Table 2.3.5U. Blue line is drawn at 6.0%.

Not surprisingly, overall spending on other items is slowing down. Real personal consumption expenditures grew at a 3% annual rate in February after falling slightly in January. Bill McBride (and you know I don’t like to argue with him) thinks this means real consumption spending for 2011:Q1 may only grow at a 1.4% annual rate. That’s less than half the rate that many analysts had been anticipating prior to Monday’s data.

Beezer here. After this piece there comes this from a commentator.

“Again, weak demand in developed countries, e.g., the US, since 2005 is not a new story. But the real story is increasing demand in developing countries. Oil consumption in the US and four developing countries for 1998 to 2009 (100 = 1998 consumption, EIA):

At Chindia’s 2005 to 2009 rate of increase in net oil imports, as a percentage of global net oil exports, Chindia would be consuming 100% of global net oil exports in 2025. As they say, somethings gotta give, and that something will largely be consumption in the US, as we will probably continue to be gradually priced out of the global net oil export market.”

Beezer again. The shift from west to east of economic growth appears pretty obvious. But the implications of this shift towards where 40% of all humans live seems not to have been recognized by the US public. In his energy policy speech Wednesday Obama spent some time addressing the medium to long term implications of not having a real non-fossil fuel energy system. But he skirted what may be the real challenge: There is not likely to be enough energy to go around with our current systems. Claims that all we need to do is develop shale oil, which is relatively abundant in the US, are blinding the US public to the real problem of resource demand outstripping supply. Nevermind that the stripping of shale rock through the process of fracking will inevitably produce yet another environmental disaster. A similar set of issues arise when you consider shale gas, including the same problem of water pollution and use in fracking.

Something else needs to be done, and done quickly. Ignoring the necessity of building a sustainable or renewable ‘plan b’ is a fatal mistake. The US economy is now trapped between periods of external shocks and recession and periods of slow growth that are not sustainable. Leadership talks in terms of decades as if we actually have 40 or 50 years to transform our systems. We don’t. Not even close.

Most people aren’t mathematically conversant. It’s pretty easy to make a graph visually show a point of view while conveniently leaving out an important point. A point like fractions have denominators.

“Normalizing government consumption and investment illustrates that overall spending by the government in purchases of goods and services is not particularly high. Even dividing by nominal GDP indicates that we are only (almost) back to the levels of 1990. Normalizing by potential GDP indicates that we are still only back to the levels of the early 1990′s (this spending includes defense).

Note that these are nominal ratios; if one looked at the log of real consumption divided by real GDP (straight division is not appropriate since these are chain-weighted series), one would see that the log ratio to potential GDP is at an all time low).

What about the overall Federal budget balance? One can examine the actual budget balance divided by nominal GDP, and the cyclically adjusted budget balance (which better summarizes the fiscal stance) divided by potential GDP. This results in Figure 3.

Finally, because the sum of Federal consumption and investment does not exhibit much counter-cyclicality, it doesn’t make much difference which series one normalizes by. However, it is of interest to note that the movements in overall Federal spending on goods and services is dominated by the defense component.

So, it is true that the Federal government’s role in terms of spending and transfers has increased against the backdrop of a massive decline in output starting in 2008Q4 — but some of the movements in various indicators are distorted by the large negative output gap that has opened up.”

Beezer here. Normalizing basically takes into account fluctuations in GDP, which is the denominator in these calculations. Paul Krugman makes pretty much the same point here.

“Special Bulletin: Fractions Have Denominators

I’ve been getting some mail over yesterday’s column, with angry correspondents posting charts like this, showing government spending as a percentage of GDP, to claim that government spending has too surged:

Bureau of Economic Analysis

But if you look at the raw numbers on government spending, here’s what you see:

Bureau of Economic Analysis

Feel the surge!

What’s going on? Yes, that’s right: it’s what happens when you divide by GDP in a time of terrible economic performance. Spending hasn’t surged; in fact, it grew more slowly in the two years after Lehman collapsed than in the two previous years, despite a sharp rise in spending on safety-net programs. Instead, GDP growth has plunged.”

Beezer again. Of course none of this is part of the public political discussion–even though it involves basic math. You’ll see it on the internet all the time. But that’s because the internet is chock full of experts in various areas who write blogposts explaining how the real world looks and works. That and the rare example of Paul Krugman, an economist who writes for the New York Times. And because none of this gets much traction in public political discourse, we careen into the dark future without our lights on, sitting in the back seat while the invisible, invisible hand drives the vehicle. No wonder we’re in the ditch.

Thanks again to economist’s view. And also thanks to Merrill Lynch, which taught me how to apply basic math, particularly as it applies to things financial.

On May 6 this year the market had what is now referred to as the ‘flash crash.’ In a matter of minutes the equity markets dropped dramatically for no apparent reason. In a matter of minutes the markets then rebounded just as quickly as they’d dropped–again for no apparent reason.

Initial reaction was that something had gone horribly wrong with a new feature of these markets, so-called computer trading algorithms that fire off automatically given certain circumstances. These algorithms now constitute a majority of daily trading volume on the equity markets.

Many of these trades are cleared away from the New York Stock Exchange, which still has human ‘specialists’ who have some discretion about the price at which stocks are allowed to trade. If the price moves dramatically and no bid or offer comes quickly along, then a specialist can place a brief hold on trading until one does. If need be the specialist can take the other side of the trade to facilitate price discovery. In fact, this is an important responsibility a specialist assumes in order to be a specialist.

The point is that someone with some expertise in the market is paying attention to price at the exchange.

Incredibly, now that the authorities have investigated this ‘flash crash’ (and there have been some mini crashes since), it is discovered some of these algorithms pay no attention at all to price. They mindlessly put in buy or sell orders irrespective of price!!!! In the May 6 flash crash, authorities had to unwind stocks that were sold (and presumably bought by someone) at zero. For nothing!

“According to the CFTC-SEC report, at 2:32 p.m. on May 6, a large trader initiated an order to sell 75,000 E-mini S&P500 futures contracts in order to hedge its existing equity positions:

This large fundamental trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time.

The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year (from January 1, 2010 through May 6, 2010)…. The Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes….

The combined selling pressure from the Sell Algorithm, HTFs [high frequency traders] and other traders drove the price of the E-Mini down approximately 3% in just four minutes from the beginning of 2:41 p.m. through the end of 2:44 p.m….

The Sell Algorithm used by the large trader responded to the increased volume by increasing the rate at which it was feeding the orders into the market, even though orders that it already sent to the market were arguably not yet fully absorbed by fundamental buyers or cross-market arbitrageurs. In fact, especially in times of significant volatility, high trading volume is not necessarily a reliable indicator of market liquidity.

What happened next is best described in terms of two liquidity crises– one at the broad index level in the E-Mini, the other with respect to individual stocks.

This episode serves as another reminder, as if we did not have enough already from the financial fireworks in the fall of 2008, that the faith many market participants have in their hedging strategies is misplaced. Aggregate risks cannot be hedged by the aggregate market. Pretending that sufficiently clever algorithms can repeal that physical law will only ensure spectacular breakdowns such as that witnessed May 6, when the absence of the aggregate counterparty becomes dramatically revealed.

It also should remind us that it can be a really stupid plan to sell regardless of the price.

And it is still a really stupid plan even if it comes out of what somebody told you is supposed to be a very smart computer algorithm.”

Beezer here: Not that we need yet another example of why regulation of private markets is necessary, but here’s another one. This is all part and parcel of the concept that government has no role in our economic lives and that private markets, if only left alone, will self correct and clear ‘prices’ accurately. Nonsense! Will someone please spray this electrical fire with foam retardant and put it out. This insanity needs to be prohibited. Technology is not the answer to everything.